At What Price Would Centrica PLC Be A Bargain Buy?

Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.
Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.
Today, I’m going to tell you why I believe British Gas-owner Centrica (LSE: CNA) (NASDAQOTH: CPYYY) is currently in the bargain basement.
Yield for utilities
Centrica, best known as the owner of British Gas, also owns a major North…

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Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.

Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.

Today, I’m going to tell you why I believe British Gas-owner Centrica(LSE: CNA) (NASDAQOTH: CPYYY) is currently in the bargain basement.

Yield for utilities

Centrica, best known as the owner of British Gas, also owns a major North American energy retailer, and recently acquired the retail arm and other assets of Ireland’s state-owned Bord Gáis.

Centrica’s operations extend beyond gas and electricity supply, but as a largely regulated utility — where shareholders’ capital is relatively safe and dividends are plentiful — the stock is particularly attractive to institutional and private investors with an income focus.

Because of these characteristics, my preferred valuation measure for utilities is dividend yield.

Valuation

The table below shows some share price and dividend data for selected periods going back to the great bear-market bottom of 2009.

Period

Dates

Share price (p) average

Share price (p) range

Dividend yield (%) average

Dividend yield (%) range

Trailing 12-month dividend (p)

1

31/7/14 – 31/8/14

313

307 – 319

5.5

5.6 – 5.4

17.18

2

31/7/13 – 31/8/13

389

383 – 394

4.3

4.4 – 4.2

16.70

3

28/7/11 – 22/2/12

295

279 – 313

5.0

5.3 – 4.7

14.75

4

26/2/09 -29/7/09

231

215 – 250

5.3

5.7 – 4.9

12.20

Period 1 covers the period since Centrica announced its latest dividend: an interim declaration with half-year results released on 31 July. You can see that since then the shares have traded at an average price of 313p, giving an average yield of 5.5% based on the trailing 12-month dividend.

During the same period last year (period 2 in the table) the share price and dividend averaged 389p and 4.3%, respectively. With the shares riding high, the average yield was significantly inferior than today.

If we go back to a spell of previous weakness in the shares (period 3), you can see that even the top of the yield range (5.3%) is still below what’s on offer today. We have to go back over five years (period 4) to the height of doom-and-gloom and the bottom of the bear market to find Centrica besting its recent high yield — and only just: 5.7% versus 5.6%.

In the bargain basement

Political flak and a regulatory review of the UK’s ‘Big Six’ energy firms, which include Centrica and SSE, have weighed on the shares and pushed up the yields. However, utilities go through these periods from time to time, and history shows that market fears are often overdone.

As such, with Centrica offering its highest yield in over five years, I reckon the shares are in the bargain basement at their current level of sub-320p.

Finally, if you already have Centrica in your portfolio and are in the market for more blue-chip stocks, I recommend you help yourself to this FREE Motley Fool report.

You see, the Fool's top analysts have identified five companies they believe will deliver superior long-term growth in earnings and dividends. Such is their conviction about the quality of these businesses that they've called the report "5 Shares To Retire On".

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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